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Finland's Russian trade on thin ice after NATO application

Published : May 18, 2022 13:55 IST T+T-
Should Finland and Sweden become NATO members, their relationships with Russia would change completely.

Should Finland and Sweden become NATO members, their relationships with Russia would change completely.

With Finland and Sweden eyeing NATO membership, their economic ties with Russia will take a hit.

Sweden's exports to Russia were worth $2.49 billion (€2.27 billion) in 2021, a mere 1.3 per cent of its total exports, according to the United Nations Comtrade database. In 2020, Sweden imported $1.22 billion from Russia. Sweden's low dependence on Russian imports is in large part due to its energy sources being mainly domestic. Its GDP has been revised down for this year from three per cent but remains relatively robust at 2.5 per cent. Inflation is likely to be a worry, but analysts say Sweden is largely immune from any direct fallout from closing down trade with Russia.

Finland, however, is another story. Russia — with which Finland, an E.U. member since 1995, shares a 1,300-kilometre (800-mile) border — has threatened to punish the country if it joins NATO. Finland in 2021 sent 5.4 per cent of its total exports to Russia and almost 12 per cent of its imports came from Russia. Not huge, but Russia plays an important role in some of Finland's key sectors, for example the paper industry and, crucially, energy supplies.

Finnish presence in Russia

It has also until now — and despite Russia's occupation of Crimea, followed by E.U. sanctions and Russian countersanctions — kept open a key commercial relationship with Russia, where many Finnish companies have business operations. In 2019, Finnish parent companies had 295 subsidiaries in Russia, with combined net sales of €6.5 billion. In 2020, Russian parent firms had 20 subsidiaries in Finland with combined net sales of €3.2 billion and employed roughly 740 people.

Finland in 2021 exported worth €68.8 billion, of which exports to Russia were €3.7 billion, or about 5.4 per cent of the total. Finland's imports in the same period were €72.7 billion, of which the value of imports from Russia was €8.6 billion, or 11.9 per cent of total imports. Finland's largest bilateral trade partners are Germany and Sweden, followed by Russia.

E.U. sanctions imposed in March have upped the stakes for Finland. The impact of the sanctions has led to a bigger drop in trade between Finland and Russia than when the Soviet Union collapsed in 1991, the director of Statistics at Finnish Customs, Olli-Pekka Penttila, told news agency Reuters .

Penttila said there were some reputational risks as companies withdrew from Russia. Finnish refiner Neste for instance has replaced some of its crude imports from Russia with Norwegian oil. Finnish forestry groups UPM and Stora Enso have stopped buying Russian wood as international certifiers labeled it "conflict timber.” In 2021, the Finnish forest industry imported around 10 per cent of its annual consumption from Russia, Finnish Natural Resources Institute data show. Finnish utility Fortum will halt all business in Russia and is weighing up divestment of its Russian operations.

"Sanctions and voluntary boycotts have halted most trade beyond energy already,” Pasi Kuoppamaki, chief economist at Danske Bank, told DW . "Most of the consequences are negative for the Finnish economy. Many exporting companies need to find new markets, which will take time when the global post-pandemic recovery is facing headwinds,” Kuoppamaki said. On the positive side, he says, industries like sawmills could benefit from lack of competition from Russia and demand for domestic timber will grow as imports from Russia come to an end.

Energy ties

Finland lacks domestic sources of fossil energy and needs to import large amounts of petroleum, gas and other energy resources, including uranium for nuclear power. It received about 34 per cent of its total energy supply from Russia in 2021, according to Statistics Finland and the Natural Resources Institute. It was importing about 80 per cent of its crude oil from Russia. Energy consumption in Finland is per capita the highest in the E.U., with half of energy consumed by industry. The cold climate means 25 per cent of consumption is used in heating and long distances mean 16 per cent of consumption is used in transport.

If Russia cuts off gas supplies to Europe at the end of May, the effects on the Finnish economy would be worse than the halting of oil imports, according to Economy Minister Mika Lintila, given that a large number of Finnish companies rely on Russian gas. "It would be a very hard blow to Finnish industry. We are talking about thousands of jobs," the minister said. "If Russian gas imports ceased, it would increase the price of gas coming through Estonia. The price of electricity would also rise," Lintila warned.

In April, Prime Minister Sanna Marin expressed her wish to "get rid of Russian fossil fuels.” A survey by Greenpeace found that 78 per cent of Finnish respondents said Finland should halt Russian energy imports, even if it meant higher bills. Majority-state-owned Finnish energy firm Fortum was until recently a partner with Russian state energy firm Rosatom in the proposed Fennovoima nuclear power plant, but announced termination of the contract on May 2, citing delays as well as the growing risks associated with the war in Ukraine.

Alternative sources

In early April, Finland and Estonia jointly decided to lease an LNG (liquefied natural gas) terminal ship to help end their use of Russian gas. The ship, a floating storage and regasification unit (FSRU), will be located on the coast of Finland near the gas transmission network. The share of gas in Finland's energy mix is only six per cent, but it is important for industry. Some gas also goes through the Balticconnector gas pipeline, which runs to the Klaipeda LNG terminal in Lithuania.

Russian state-owned company RAO Nordic recently halted electricity exports to Finland, blaming Western sanctions. Finnish officials said imports of Russian electricity accounted for only 10 per cent of its consumption and the deficit could be managed. "The lack of electricity imports from Russia will be compensated by importing more electricity from Sweden and by generating more electricity in Finland,” said Reima Paivinen, senior vice president of power system operations at the national grid operator, Fingrid.

However, losing gas supply would mean Neste, Metsa and other companies in the forestry, chemical and food industries would have to find alternative energy sources. "While Finland's economy will be hit harder than most other eurozone economies from a broader loss of trade with Russia, the direct effect of a cessation in Russian gas supplies would be small,” Nordea Bank said.

Finland imported 70 per cent less crude oil from Russia in March, replacing it with imports from Norway, according to data published by the Customs Office. The value of oil purchases from Russia in March fell 45 per cent from a year earlier. Neste, the largest buyer of crude oil from Russia, announced two weeks into the war that it had replaced most of its Russian crude with other grades, such as Brent.

Russia will suffer

"Finland and Sweden have accounted for roughly three per cent of Russian exports, the loss of which would be an additional blow to the Russian economy heading towards a severe recession,” Kuoppamaki said. He added that in addition to benefits from trade, Russia would need foreign technologies to modernize its own production and maintain productivity growth. Russia would face a growing technological gap with the developed world and its economic importance will shrink. "Russia has been using energy as a strategic tool and in the future nobody wants to end up being dependent on Russian energy. The future of the Russian economy looks bleak,” Kuoppomaki concluded.

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